OCM Briefing Paper
February 7, 2000

By Michael Stumo
General Counsel, Organization for Competitive Markets
and C. Robert Taylor
Agricultural Economist, Auburn University

I. Introduction - Under federal antitrust law, only direct purchasers or direct sellers (direct parties) have the right to a remedy for antitrust harm. Indirect purchasers or sellers (indirect parties) who have been harmed by antitrust injury transmitted through the distribution channel have no federal right to a remedy pursuant to Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977). However, 14 states and the District of Columbia have passed Illinois Brick repealers, thereby allowing indirect (or pass through) suits.

II. Rationale for the Rule - The basic reasons for the 1977 rule barring pass through suits include: (1) defendants could be charged with multiple damages, i.e. full recovery by the direct parties plus additional indirect party liability; (2) apportioning damages to the various levels is complex, burdensome and speculative; and (3) limiting suit to direct parties is a more "efficient" way of enforcing the antitrust laws.

III. Rationale Against the Rule - Since 1977, the agricultural economics profession has made great strides in analyzing the degree to which pass through harm can be calculated. Thus, damages can be apportioned as to direct parties and indirect parties without risking double recovery. Additionally, multiple levels of accountability are necessary for the operation of efficient and competitive markets (just as multiple levels of accountability are necessary in a democracy) to prevent continuing unilateral abuses of power.

In the recent lysine price-fixing case, for example, some large feed companies were awarded damages as direct purchasers. Yet, since the feed industry is characterized by cost plus pricing, feed companies passed the costs of higher lysine prices on to livestock feed purchasers. Most livestock feed purchasers were unable to recover the lysine price-fixing damages because they did not have standing in federal court.

Agribusiness has rapidly evolved to a system where there may be a reasonable balance of power between food retailers and food processors. However, there is a gross imbalance of power between food processors and independent farmers-small family farms and large commercial farms alike. Thus, independent farmers are increasingly squeezed from exertion of market power by processors and retailers.

The farmers share of the retail food dollar has been shrinking rapidly. Over the past 15 years, the retail cost of a market basket of food purchased for at home consumption increased 3%, while the farm value of that market basket decreased 36%. The farmers' share of the food dollar decreased by 4.4% in 1997 alone. This correlates with the doubling of the five firm concentration level in the retail food industry in the past five years, and increased concentration in food processing and wholesaling. Assuming retailers are violating antitrust laws and forcing down wholesale prices, the wholesalers and food processors can easily pass those damages down to the farmer. The food processor has no incentive to sue for antitrust harm because it can transmit the damage to the farmer and because a suit would damage its relationship with the oligopsonistic retailer. Thus, the farmer is the ultimate injured party while being foreclosed from seeking a remedy by Illinois Brick. The retailer is held harmless and is undeterred from escalating its antitrust violations.

Since virtually all of the profit has been squeezed out of farming, it is the food consumer who may suffer damages from antitrust violations in the future. As indirect purchasers, the food consumer, like the independent farmer, does not have standing in court under the Illinois Brick decision.

Government enforcement authorities do not have the resources to eliminate antitrust violations in a vast and complex economy. Law enforcement and a system of compensation must be "outsourced" and fostered through private enforcement. This means the proper rules must be in place to allow injured parties, such as farmers and consumers, to seek a remedy for harm without relying on government bureaucracies to do it for them.

IV. The Class Action Issue - Most price fixing cases, whether direct or indirect parties, are brought as class actions. Federal Rule of Civil Procedure 23 requires common issues to predominate over individual issues. The class action rules are analytically distinct from the issue of proving damages. Many class action cases brought in state courts under state Illinois Brick repealers have failed under class certification rules due to the predominance of individualized damages issues for many indirect parties (usually consumers buying in different stores in different geographic regions). But some cases, such as those brought under the District of Columbia Illinois Brick repealer, have been granted class status because the statute allows proof of injury "on a classwide basis, without requiring proof of such matters by each individual member of the class."

V. The Federalism Issue - Illinois Brick is not preemptive of state repealers. State Illinois Brick repealers have been held constitutional by the U.S. Supreme Court. See California v. ARC America Corp., 490 U.S. 93 (1989).

VI. Recommendation - The interest of farmers and consumers in seeking a remedy from anticompetitive conduct by retailers and processors has never been greater. In the 1970's, farmer cases against retailers met with significant success in compensating producers for antitrust harm. Those cases halted after the Illinois Brick decision. Since then, the retail share of the food dollar has grown dramatically with farmers unable to receive compensation for harm.

Repeal of Illinois Brick would allow private efforts to ferret out anticompetitive conduct in the economy and compensate financially ailing farmers, as well as consumers, for antitrust harm. However, a federal repealer must deal with the class action issue (by allowing proof of harm on a classwide basis) as well as prevent double recovery (apportioning damages between direct and indirect parties).